Google, Apple, Tech Giants Can Find Major Growth In One Place: Cars

Google parent Alphabet, in its earnings release yesterday, showed that its non-advertising revenue was growing at a pace, 62%, more than three times as fast as its traditional source of sales. But advertising still comprises 87% of the company's revenue.

The company got dinged by some analysts for missing the consensus number for earnings per share, but many observers were buoyed by the growth of non-advertising revenue sources.

Apple, of course, while more diversified than Google, is fighting some of the same pressures: the company has become primarily a phone maker and its sales are tethered to the fortunes of its iPhone franchise. Both companies, as well as other tech giants, have long been watching what most consider the next big platform in tech: cars.

It seems as if Alphabet has abandoned any plans of actually making cars, but Alphabet's Waymo division seeks to take all of the learnings from the Google Car project and turn them into the guts of the next generation of cars. In this strategy, Alphabet seeks to be Delphi rather than GM.

But that doesn't mean that other tech giants, notably Apple, and perhaps Uber, aren't eyeing the possibility of stamping their logos into a car grille.

Tech companies are flush. Credit: Eli McNutt, FundersClub

There isn't anything that compares to the potential and size of a future car market that will be infused with automation and software.

Five of the top six companies by market cap are tech companies—Apple, Alphabet, Microsoft, Amazon and Facebook—and three of them have had IPOs during the last 20 years. It's not easy to grow at big clips for companies already worth half a trillion dollars. The car market is one of the few places that's big enough to make a difference, however, so it will continue to be scrutinized and sized up by these keystone tech companies.

There are other ways for these companies to grow outside of vehicles, of course, but none of them hold the same potential. Google, like many in Silicon Valley, has been focused on growth through the cloud. It's happening, but it's still behind others. Google doesn't break out its cloud revenue, but it looks to be squarely lagging both Amazon and Microsoft, whose cloud businesses are both on annual revenue run rates north of $14 billion.

Ross Mason, co-founder at Mulesoft, which enables communication between disparate cloud platforms, and has many car-company clients including Tesla, Audi, and BMW, sees the whole thing as a race: Will GM or Ford become a maker of great software before one of the tech behemoths becomes a maker of cars?

"Everyone, including Google, Ford, Apple, GM, Tesla, Lyft, Microsoft, Toyota and Uber, wants to own the car platform to ultimately own the passenger experience," Mason says. "Silicon Valley natives really know how to build software, and car manufacturers really know how to build cars. The key lies in combining manufactured cars with intuitive, smart software to offer consumers the experiences and services they want or, even better, don’t know they want until they have them."

The idea of a tech company that many can recall as a pre-IPO startup buying one of the most venerable and large brands in the world might seem impossible, but there is certainly precedent. Google, of course, bought much of Motorola for $12.5 billion in 2012. The company retained some IP and patents that many see as key to defending the Android operating system, but the gambit fell short of expectations, overall.

The car companies may prove to be great software makers, but they're not there yet.

"Many of the core competencies needed for the autonomous vehicle do not currently reside within the Big 3 or the big international players," says Joseph Nagle, the director of marketing at Evercharge, which makes rapid charging systems for electric vehicles.

It may only take one economic flat period to trigger the great tech invasion of the car realm. Companies such as Ford still derive nearly 90% of their profits from trucks and big SUVs. When the economy tanks—as it did in 2008—people stop buying $50,000 trucks. Carmakers, especially the American ones who rely on the margins attached to large vehicles, are inordinately harmed in during these periods.

A downturn in the markets could seriously dent carmakers' stocks, making them takeover targets for tech companies hungry for car manufacturing infrastructure and expertise.

The market cap valuations of major carmakers are far below those of the keystone tech companies:

Ford: $48 billion

GM: $55 billion

Fiat Chrysler: $18.8 billion

But that doesn't tell the entire story. Ford and GM, in particular, are carrying very large debt loads, making their enterprise values, their real cost to an acquirer, unwieldy. A prolonged downturn could push those stocks down, but tech companies would likely seek some kind of deal from the car companies' debt holders.

For this reason, the car company to watch may well be Fiat-Chrysler, which has seen less robust sales, but comes with a far smaller market cap and only $26 billion in debt, compared with $80 billion for GM and $137 billion for Ford.